Does Japan Offer Any Lessons for the United States?

Executive Vice President and Director of Research, Federal Reserve Bank of Boston. The author thanks Jennifer Duval for valuable research assistance.

Note: This article was written before the events of September 11, 2001, and some of the analysis will seem dated. Policy lessons from Japan's experience may still be pertinent.

In the late 1990s, some observers began to make comparisons between the rapid rise in stock prices then taking place in the United States and the escalation in asset values in Japan in the late 1980s. Did Japan's experience, which was followed by more than a decade of stagnation, contain any cautionary lessons for the United States? The Economist, in particular, warned that the United States might be experiencing an asset price bubble. (1) More frequently, the question was posed rhetorically and was quickly followed by a resounding "No." The United States is not like Japan. Its economic fundamentals are much sounder, and its policymakers will not make the same mistakes.

With the recent slowing in the pace of U.S. economic activity, the question has been asked more earnestly; and while the prevailing view remains that the United States is not Japan, the denials have been less forceful. (2) Commentators have become less optimistic about the U.S. outlook, even as they recall that Japanese fundamentals appeared very good in the late 1980s.

This article compares Japan's experience during the 1980s with U.S. prosperity in the 1990s, trying to discern the extent of similarities and differences. It then provides an overview of how Japanese policymakers responded once economic conditions began to deteriorate. Japanese policy has been harshly criticized by U.S. economists; so Japan's mistakes may provide lessons for policymakers here and elsewhere. The article does not attempt to break new ground in this regard; so those familiar with Japan's circumstances will find little that is new, although possibly some differences of interpretation.

On balance, the conclusion is reassuring. Although similarities exist between Japan's economic performance in the 1980s and U.S. experience in the late 1990s, land values, as well as stock prices, rose very rapidly in Japan. Bank lending backed by land also rose very rapidly. This is a critical difference, as the subsequent decline in Japanese land values crippled the Japanese banking system and economic activity generally.

On the policy front, U.S. economists have criticized Japan for moving too slowly and too timidly to address its problems. To this author, the criticisms seem harsh. Knowing how much is enough is a difficult challenge, and the external environment that Japan faced at key junctures in the 1990s was unfavorable. Nevertheless, after a decade of economic stagnation, no one can dispute that policy was inadequate. If nothing else, Japan's experience shows that time does not heal all economic wounds.

I. Japan in the 1980s versus the United States in the 1990s

The broad outlines of Japan's story are familiar. Japan grew vigorously in the 1980s, faster than any other industrialized country. The stock market soared; land prices also increased rapidly. This increase in asset prices is now viewed as a bubble. In the early 1990s, both stock prices and land values collapsed; they remained depressed through the rest of the decade. Economic growth sputtered almost to a halt and then failed to reignite. The Japanese economy has stagnated for over ten years.

During the 1990s, the United States experienced a period of vigorous growth combined with a rapid escalation in stock prices. While people have debated for some time whether the run-up in stocks reflected economic fundamentals or a bubble psychology, the collapse of the technology-oriented Nasdaq index over the course of 2000 has emboldened those who argued for a bubble and has fostered more comparisons with Japan's experience in the 1980s. …

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